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Investing Research Articles

Just Protecting Their Investing/Trading Reputations?

People worry about their professional reputations. Does this worry on the part of institutional fund managers translate into any systematic investing/trading practices, and thereby create asset mispricings? In the November 2005 update of their paper entitled “Asset Price Dynamics When Traders Care About Reputation”, Amil Dasgupta and Andrea Prat describe a model for incorporating concern about reputation into institutional (mutual) fund manager behavior and compare predictions of that model to results of other research. They conclude that: Keep Reading

An Overview of Investor Animal Spirits

What formal studies does academia have to offer on the role of emotions in equity investing/trading? In their October 2004 paper entitled “The Role of Feelings in Investor Decision-Making”, Michael Dowling and Brian Lucey synthesize the results of two threads of recent areas of research on whether and how emotions affect investing: (1) mood misattribution (the impact of environmental factors, such as the weather, the body’s biorhythms and social factors); and (2) image (how investors feel about companies separately from any financial analysis). They note that: Keep Reading

Classic Research: Embrace Risk, But Take Profits

We have selected for retrospective review a few all-time “best selling” research papers of the past few years from the General Financial Markets category of the Social Science Research Network (SSRN). Here we summarize the February 1999 paper entitled “Daily Momentum And Contrarian Behavior Of Index Fund Investors” (download count almost 1,900) by William Goetzmann and Massimo Massa. The authors investigate the existence and profitability of momentum and contrarian behaviors for stock index trading. They classify return momentum investors (trend followers) as those who buy (sell) when the market rises (drops) in the previous trading session, and return contrarian investors as “profit takers” who sell (buy) when the market rises (drops). They also examine investor response to changes in market volatility, defining both volatility momentum traders (risk chasers) and volatility contrarian traders (risk avoiders). Using daily activity records for 91,000 accounts trading an S&P 500 index during 1997 and 1998, the authors find that: Keep Reading

Finding Memes for Contrarian or Trend-following Plays

The Internet enables rapid flow and ebb of trading memes. Trend followers hope to ride a meme and get out before it fades. Contrarians take the other side in anticipation of the fade. Traditional tools for inferring memes include price-volume action and market sentiment. Do emerging information-filtering technologies present novel ways of discovering investing/trading memes from surges of news on the web? Building on ideas offered in the article “Finding Signals in the Noise” from Technology Review, we offer a few possible meme-detectors: Keep Reading

Out-of-Sample Test for a Stock Market Model

In their April 2002 paper entitled “Solving the Price-Earnings Puzzle” Carl Chiarella and Shenhuai Gao investigate the interrelationships of stock prices (the S&P 500 index), earnings and interest rates (the Federal Funds Rate) during January 1979 to August 2001. They conclude that the stock index is proportional to aggregate earnings and inversely proportional to the interest rate. Using data for these variables since January 1990,  we find that: Keep Reading

Should Equity Investors Hope for Good or Bad Economic Forecasts?

Do forecasts for the economy at large predict returns for stock investors? In the September 2005 version of their paper entitled “Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence”, Sean Campbell and Francis Diebold characterize the relationship between expected business conditions (predictions of real growth in GDP six and 12 months ahead) and stock returns. Using half a century (1952-2002) of Livingston Survey expected business conditions results and corresponding measures of expected stock returns, they conclude that: Keep Reading

The Frailty of the Size Effect?

Do long-term investors in small-capitalization firms outperform? Is the size effect simply a manifestation of data snooping or defective statistical methodologies? In his January 2006 paper entitled “Is Size Dead? A Review of the Size Effect in Equity Returns”, Mathijs van Dijk reviews the international evidence for the size effect and synthesizes the debate on its theoretical validity and empirical persistence. He concludes that: Keep Reading

(Not) Capturing the Elusive Value Premium

Do long-term value investors outperform? In their paper entitled “Do Investors Capture the Value Premium?”, Todd Houge and Tim Loughran seek the answer to this question by examining groups of value and growth equity indexes, mutual funds and individual stocks over long periods. They conclude that: Keep Reading

No Reward for Risk?

The market rewards investors for taking risk. Right? High volatility means high risk. Right? High volatility therefore means excess return. Right? In their January 2006 paper entitled “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence”, Andrew Ang, Robert Hodrick, Yuhang Xing and Xiaoyan Zhang test the relationship between past idiosyncratic volatility and future returns for stocks in developed markets around the world. Using data from 23 countries mostly over the period January 1980 through December 2003, they find that: Keep Reading

Last Nail in the Coffin of the Fed Model?

Fed Model proponents argue that there is an equilibrium relationship between the earnings yield of a stock index and the 10-year government bond yield. When the earnings yield is below (above) the 10-year government bond yield, the stock market is overvalued (undervalued). In his January 2006 paper entitled “The Fed Model: The Bad, the Worse, and the Ugly”, Javier Estrada recaps the (lack of) theoretical basis for the Fed Model and tests its empirical support in the markets of 20 countries. Using both actual (trailing) and projected (forward) earnings for total market indices over various periods ending in June 2005, he concludes that: Keep Reading

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